What Are the Most Common Strategies Used in Options Trading?
Long Call Strategy
Optional trading can be a lucrative investment strategy for those with a good understanding of the market and the right approach. However, with proper planning, it can be a safe business that could lead to significant financial losses. One of the keys to successful option trading is to use proven strategies that have been tested and proven over time. This article will discuss the most common strategies used in trading.
The long call strategy is one of the simplest and most popular options trading strategies. It involves buying a call option, which gives the trader the right to buy an underlying asset at a specified price, called the strike price, before the expiration date. The trader is betting that the underlying asset will increase in value before expiration. If the trader is correct, the call option’s value will also increase, allowing the trader to sell it for a profit.
Short Call Strategy
The short call strategy is the opposite of the long call strategy. It involves selling a call option, allowing the trader to sell an underlying asset at the strike price if the buyer exercises the option. If the trader is correct, the call option’s value will decrease.
Long Put Strategy
The long put strategy is another popular options trading strategy. It involves buying a put option, giving the trader the right to sell an underlying asset at the strike price before the expiration date. If the trader is correct, the value of the put option will increase.
Short Put Strategy
The short put strategy is the opposite of the long put strategy. It involves selling a put option, which allows the trader to buy an underlying asset at the strike price if the buyer chooses to exercise the option. The trader bets that the underlying asset will stay the same value before expiration. If the trader is correct, the value of the put option will decrease, allowing the trader to repurchase it for a profit.
Covered Call Strategy
The covered call strategy is a popular options trading strategy for investors who own the underlying asset. It involves selling a call option on the asset while owning an equivalent number of asset shares. This strategy limits the trader’s potential profit from the underlying asset and provides a steady income stream from the sale of the call option. If the underlying asset’s price rises above the strike price, the call option will be exercised, and the trader will sell the shares at a higher price. If the underlying asset’s price does not rise above the strike price, the trader keeps the shares and the income from selling the call option. For example, SoFi experts explain, “If you think a stock’s value is going up, you’ll buy a call option. If you think a stock’s value is decreasing, you’ll buy a put option.”
Options trading can be a lucrative investment strategy for those who understand the market and use the right approach. However, it can also be risky, leading to significant financial losses without proper planning. Using proven strategies, such as the long call, short call, long put, short put, and covered call strategies can increase the trader’s chances of success while limiting their risks.
